Will debt-for-equity swaps save China’s overcapacity businesses?

China is planning a debt-for-equity swap program to help companies mired in overcapacity to lower their debt burden.

Now, let us examine if the move will really prove effective in resolving the problem.

First, how bad is China’s non-performing loans (NPLs) situation?

According to the annual results statements of the nation’s 11 listed banks, their combined NPLs in 2015 amounted to 938.8 billion yuan, up 49 percent from a year earlier. The average NPL ratio was 1.56 percent.

NPLs have risen significantly in the past two years. We don’t know how many bad loans are yet to be recognized.

The IMF warned recently that loans with risk potential in China‘s banking system may have accumulated to about US$1.3 trillion, accounting for about 7 percent of the nation’s GDP. It could lead to US$756 billion potential losses for China’s commercial banks.

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